AN INQUIRY INTO THE BASICS OF PENSION FINANCE
University of Amsterdam, Netherlands
Abstract. The present paper deals with some basic characteristics of both pension
finance systems pay-as-you-go and capital reserve. The merits and demerits of both
finance systems are discussed at length. The major question mostly asked is
whether funding does matter and if so, which conditions have to be fulfilled.
Funding generally does not transfer the pension burden over time, opposed to
frequent usual thinking. Apart from stimulating national savings and investments
the major advantage of funding is that it provides the best way of securing pension
liabilities and an adequate mechanism for solving the distributional problem of
national product between the retired and non-retired by the ownership of (part of)
the capital stock. After many years of debate of pay-as-you-go versus funding it can
be concluded that the debate has lost much of its heat. The issues are better
understood and there is convergence on some basic points.
Pensions are part of the support (income-maintenance) system that has evolved in
western countries since the second world war. The system expanded significantly
in that period of nearly uninterrupted economic prosperity.
In the 1950's, 1960's and 1970's attention was primarily directed to the rapid
expansion of social security and to the proliferation of supplementary pension
plans. Since the 1990's a period of maturity has set in. This period of maturity
begins in a time of major demographic and family changes.
This paper 1 deals with the similarities and dissimilarities, merits and demerits of
both pension finance systems pay-as-you-go and funding. After an introductory
paragraph on basic and complementary pension schemes the basic characteristics
of both financing methods are presented in paragraph 2. In paragraph 3 the
question whether funding does matter is dealt with and if so, which conditions
have to be fulfilled. Paragraph 4 looks at the relevance of the o